Is the NBCU-Comcast deal really about a new business model for cable?

By Tom MacIsaac, CEO, ExtendMedia

MacIsaac predicts Comcast will use NBC to go over the top. Photo: ExtendMedia.

That cracking sound you hear is the walls of the clubby world of cable beginning to crumble. Everything in the media world — ­ especially the world of media distribution –has changed as a result of Comcast (CMCSA) taking control of GE's (GE) NBCUniversal.

Many people think this is a deal to preserve the status quo — that it is no different from News Corp.(NWS) controlling DirecTV or Time Warner's (TWX) ownership of Time Warner Cable (TWC).

As we all know, both of those deals failed to provide the heavily promised synergies between programming and distribution and have been since unwound. That being said, I believe there is a lot more to this story.

Comcast is among the major distributors with a clear long-term world view and digital savvy.  It sees that its core business faces a big challenge in the form of broadband-distributed premium content to the TV–so-called "over-the-top" video; it also understands that over-the-top video is inevitable and full-fledged deployments are on the horizon.

And while plenty of analysts believe consumers won't cut off their cable services — they like the convenience and the linear programming — even cable bulls recognize that a new generation of consumers may bypass cable subscriptions altogether in favor of an over-the-top approach. And so even though Comcast looks like it is trying to preserve its cable distribution primacy by acquiring NBCUs trove of content, the cable operator quietly is making moves that suggest to me that it plans to launch a national "over the top" services in the not-too-distant future.

Going national?

In 2006 Comcast bought the software infrastructure (thePlatform), and then they launched an aggressive IP network infrastructure initiative (Project Excalibur).

Now with the NBCU acquisition, they control a sufficient wealth of premium content that, when combined with web content, will be enough to launch a meaningful "over the top" consumer offering.

When they can't grow their traditional business (already the case — telephone services have been powering their meager growth for the last few
years) they will have the all the ingredients to distribute video over broadband – in and outside Comcast's cable footprint – and it won't need anyone's permission.

The new growth driver will be a broadband distributed service to new geographic markets at a lower price point. At the outset it wouldn't have all the programming customers desire — shows from ABC or CBS, for example — but it would have enough content to drive eyeballs and attention away from subscription cable services.

Time Warner Cable, Cox, Cablevision, Charter: watch your backs and your precious subscriber bases.  It's a risky, potentially cannibalistic move for Comcast, but the alternative is that someone else (Apple, AT&T, Microsoft or Google) gets there first. Even so, it seems a sure bet that Comcast would be ready to be ready to respond very quickly and in a powerful way. In fact, think about Comcast's "On Demand Online" as a dry run for a national "over-the-top" offering.

Operators will unlock cable content for digital distribution, build out the distribution infrastructure, and condition users to access content on multiple devices. All that will be left to do will be to throw the business model switch to out-of-footprint subscription and build out a TV interface (the digital home problem will be solved in parallel via web-connected TVs, special-purpose low cost set-top boxes, etc.)

It's not just about responding to free ad-supported Web offerings like Hulu and Google's (GOOG) YouTube, but also to services that look more like pay TV, like iTunes, Netflix (NFLX), and Amazon (AMZN).  These new video services may have business models that are familiar — subscription, VOD, etc. — but they are unencumbered by geographic footprint.

Comcast's out-of-footprint over-the-top service is inevitability. The media world will be forever changed and the cozy club of non-competing cable operators will be a thing of the past.

MacIsaac is CEO of ExtendMedia, a Boston-based company whose technology enables content providers and distributors to create, deliver, manage & monetize online content offerings over many devices.

Hulu touts about TV anytime, anywhere. But hooking your TV to the Net? Crazy talk!

Funny pages: Hulu offers web video, but doesn't encourage Net TV. Image: Hulu

I had an epiphany early last year when I visited Hulu for an article David Kirkpatrick and I were writing about the unexpectedly successful young venture.

Watching TV shows on Hulu was such a pleasant experience with Hulu that the company should encourage users to connect their PCs to televisions. Technologically it's not a difficult thing to do, but it's not terribly convenient. A PC needs to be near the TV, the remote-control experience isn't good, and so on. I remember Hulu executives smiling kindly at my suggestion but not offering much in the way of feedback.

With hindsight, I see how naive I was.

Hulu's owners are Fox Televion (a unit of News Corp. (NWS)), NBC Universal (controlled by General Electric (GE)), and, more recently, Disney (DIS), which owns ABC. The last thing these media conglomerates want is for their Webby startup to go around encouraging people to watch Internet videos on their TVs.

Technology is not the problem

Internet ads are small potatoes compared with TV spots. Online advertising may be growing, but it doesn't replace the big bucks from broadcast, cable and satellite TV. Hulu talked a good game about doing what was right for consumers, and it did build nice video viewing software on the Web. But when it comes to encourage folks to  use Hulu on their TVs? No way.

So as we head into 2010 the long-assumed dream of an "Internet bypass" or "over-the-top video" remains just that, a dream.

Consider:

* Boxee, a startup whose software makes it easy to connect TVs and PCs has been playing a cat-and-mouse game with Hulu for the very reasons described above.

* Apple (AAPL) has had next to no success with Apple TV, a niche product that enables TV viewing of videos in an iTunes playlist — and nothing else.

* Sony (SNE) recently introduced an Internet-enabled TV with the promise of customers being able to  purchase a Sony movie. Yet the movie comes with an exorbitant price tag so as to avoid upsetting Wal-Mart, the nation's largest seller of DVDs and therefore an important Sony vendor.

These are all baby steps for something that, technologically at least, seems inevitable. As Richard Greenfield of Pali Capital  told The New York Times: “The time when a majority of consumers have Internet-enabled TVs is a long way off. “But it’s moving the ball in the right direction.”

Why does it have to be so hard? That's easy. Incumbent video providers will hold on to their diminishing profit margins as long as possibly can even while saying they are embracing new technology, like Hulu. Introduced eight Bravia models that are Internet-enabled won't solve the problem.

What will?

On NBC's Press: Here (airing 8/23), Fortune's Jon Fortt, TechCrunch's Sarah Lacy and host Scott McGrew chat with SAP executive board member John Schwarz. For all four video segments online now, check out video on the Press: Here website. (SAP) (IBM) (ORCL) (CRM) (MSFT)

Alec Baldwin promotes Hulu in traditional TV spots.

The Web video shakeout has begun. Hulu, a venture of NBC, ABC, and Fox, is growing nicely, aided in part by a slick marketing campaign using, of all things, television ads starring Alec Baldwin. But a slew of smaller sites are starting to reformulate their strategies in the hope of surviving.

Joost, which was started by the founders of Skype Technologies, recently announced it would reinvent itself as a wholesale technology provider for media companies to publish video. The New York City–based outfit was launched amid great expectations in 2006 with $45 million in funding.

Video-sharing site Veoh may also be in trouble. High-profile backers, including ex-Disney (DIS) CEO Michael Eisner and Goldman Sachs (GS), have sunk $99 million into the New York–based site since its 2005 launch. In addition to the usual startups costs, Veoh has been hobbled by an expensive court battle with Vivendi's Universal Music Group over alleged copyright violations.

Back to main story: Google (still) loves YouTube

The departure of outsized NBC chief Ben Silverman is the third time that the producer will team up with IAC’s Diller.

By Richard Siklos, Editor at large

Silverman, shown at Fortune Brainstorm Tech, days before leaving NBC. Photo: Robin Twomey

Ben Silverman’s  departure from NBC this morning comes as no huge surprise: he was an out-of-the-box choice to head programming at major broadcast network and his two-year-plus tenure was marked by lots of attention on Silverman’s outsized persona but little yet in terms of new prime time hits for the long-struggling Peacock Network. (For more on Silverman see our story, The Player.)

It also makes perfect sense that Silverman’s exit  involves the creation of a new and as yet unnamed production company in partnership with IAC Interactive Corp., (IACI) the Internet company led by mogul Barry Diller. This will actually be the third time that Silverman and Diller have teamed up to produce ventures aimed at melding conventional TV advertising, programming and Web—and both other times yielded the men handsome returns.

“Barry stirs the pot and he sees the future,” Silverman said in an interview today. 

Diller, on stage at Brainstorm Tech, bets on Silverman. Photo: Amy Crilly

The history here is that Diller backed Silverman with $10 million in the creation of his production company, Reveille, back in 2002.  Silverman had made a name for himself at the William Morris Agency in London for importing foreign show concepts like Who Wants to Be a Millionaire for the U.S. audience and re-selling formats around the world.

And when Silverman set up a second fund at Reveille before joining NBC in 2007, Diller backed him again with another $15 million (quietly—you find no mention of these investments in the financial statements of IAC, better known for Web sites like Match.com and Citysearch.). Indeed, Diller and Silverman were talking about a third and larger Reveille fund when Silverman decided to take the NBC job in 2007, a move that led to him selling Reveille a year or so later to Elisabeth Murdoch’s Shine Group for some $120 million. (NBC is part of NBC Universal, a joint venture of GE (GE) and France's Vivendi (VIVDY).

The size of the new venture, nor its name, have not been disclosed. One thing that is clear is that Silverman may be more comfortable and adroit as a seller rather than a buyer of programming–NBC said it could also be a backer or partner of Silverman’s new venture, and it seems likely that both Shine and Sony (who also looked at backing the old Reveille) would look at being involved.

At Reveille, Silverman made a  name with such shows as ABC’s Ugly Betty (originally a Columbian telenovela) and NBC’s The Office (derived from the British sitcom hit.).  A frenetic character, Silverman had also developed and sold the original show The Tudors to Showtime and done deals with Microsoft.  But where Silverman and Reveille really made a name was in the packaging of product-placement laden and sometimes shlocky reality fare like The Biggest Loser. And Silverman prides himself on being a “360” media executive who understands not just the creative end but the marketing, technological and international ends of the business at a time when the conventional TV advertising spot is in serious decline.

Silverman/Diller 3.0 will differ from past iterations by focusing on providing the international, digital and advertiser relationships for established producers who Silverman has done business with – a group that might includes Office co-producer Greg Daniels or TV host/producer Ryan Seacrest, a close Silverman pal.

Silverman’s marketer-first approach to network programming may be the future of television but Hollywood traditionalists bristled at his approach at a time when the downturn compounded the network’s challenges: Two of NBC's dramas last  featured Ford and General Motors products as de facto characters in the shows, but both were soon off the air. Silverman’s  biggest legacy at NBC, along with that of NBC Universal CEO Jeff Zucker, who hired him, may be the decision to give Jay Leno a weeknight live variety show at 10 p.m. starting this fall, on the argument that such shows are less expensive to air than conventional dramatic series and live TV is less prone to recording and ad-skipping. (Plus Leno may have gone to a rival network).

Silverman said that his tenure at NBC can’t be judged until at least November, when the first true slate of shows he developed at the network will air—and once the dust settles from the Leno move.  But he did concede that corporate life in a megalith like General Electric  may not have been the perfect fit  for him. “I want to build a culture, I don’t want to try and change a culture,” he said. “And that did hit me.”

Both Silverman and Diller were at Fortune Brainstorm TECH last week in Pasadena, albeit on different days.  Tellingly, Diller spoke about how the production of video was fundamentally changing and how shows can be produced more cheaply by a new generation of talent that is adept both in front of and behind the camera. For his part, Silverman – who arrived with a retinue of NBC PR folks—was his usual ebullient self, and spoke mainly of relationships that NBC is forming with advertisers rather than specific programs. The pair sewed up their new arrangement after Diller spoke at the conference on Friday.  Zucker replaced Silverman with broadcasting veteran Jeff Gaspin, who will oversee not just the network but NBC’s profit-spinning cable channels.

Two developments in the wake of NBC Universal's (GE) weekend exit from Apple's (AAPL) iTunes store:

Ruport Murdoch's Twentieth Century Fox (NWS) is reported to be "actively negotiating" with Apple to put new releases and catalog titles on iTunes beginning in early 2008. According to Rich Greenfield at Pali Research (link; activation required) several things have changed to break the deadlock, including growing levels of movie piracy and new flexibility on Apple's part in terms of pricing. Greenfield's casual speculation that Apple might be willing to charge $15 per movie download has triggered some interesting analysis (see AppleInsider and Ars Technica's Infinite Loop) but should probably not be treated as gospel.

NBC Universal CEO Jeff Zucker placed his company's digital strategy last on his list of priorities in a luncheon speech at the UBS Global Media & Communications Conference on Monday. Repeating an earlier claim that NBCU's deal with Apple was worth "only $15 million" in profit, he added: "That’s nothing to sneeze at, every dollar matters. But it wasn’t the game changer for us that it was for Apple." He pointed to NBC's video offerings on Amazon and NBC Direct and singled out for praise hulu.com, its joint effort with News Corp.:

We're in the beta test with Hulu and we have 60,000 users, seven major advertisers. The online press wanted to kill it, but it's doing well. Advertisers tell us they want a safe environment. That's what this is about. They don't want a cat on a skateboard, but they do want The Simpsons or a film they like. (see Paid Content's report here)

No more ad-free episodes of The Office, 30 Rock, Scrubs or Friday Night Lights for $1.99 each.

As promised, NBC (GE) removed all its content and that of its affiliates from the iTunes Store over the weekend after its contract with Apple (AAPL) expired.

That means no shows on iTunes from Bravo, mun2, NBC, NBC News, CNBC, NBC Sports, Sci Fi, Sleuth, Telemundo or USA Network. (Some shows aired on NBC but produced by other Hollywood studios such as Viacom, Disney or 20th Century Fox are still available.)

NBC has put some of that content on NBC Direct, an ad-supported download service that runs only on Windows machines; a Mac version is due next year. Its shows will also be available on hulu.com, a joint venture with News Corp. Both services are still in beta.

NBC had been Apple's single largest partner for digital video, with more than 1,500 hours of programming representing either 30% or 40% of iTunes video content, depending which side you believe. Talks to renew the contract reached an impasse last August. NBC wanted to be able to charge more than $1.99 for its most popular shows. Apple insisted on a flat per-show rate and claimed that the network wanted to raise prices to as much as $4.99 per episode. (See Apple to NBC: Drop Dead.)

In a recent interview, NBC Universal CEO Jeff Zucker insisted its demands were "modest" and complained that Steve Jobs was undervaluing video content in order to sell more iPods.

“We don’t want to replace the dollars we were making in the analog world with pennies on the digital side,” he said, according to Variety.

For a simple comedy sketch, the Saturday Night Live takeoff on the new "black backdrop" Apple (AAPL) iPhone ads carries an awful lot of corporate baggage.

The bit aired Nov. 3 and the video was posted the next day on YouTube — and enthusiastically linked to by TechCrunch.

It's funny enough, with a clever set-up for the "pinch it" gesture. But by Sunday afternoon, NBC Universal (GE) had scrubbed the free version off YouTube, a site that many broadcasters see as a threat to their business model.

If you want to see the SNL sketch today, you either have to go to hulu.com, NBC and News Corp.'s (NWS) invitation-only (while in beta) answer to Apple's iTunes Music Store, or visit the official SNL page on NBC's corporate site. Either way, you must sit through a 15-second TV-style commercial before you get to the clip — a chilling vision of what the Internet would look like if it had been invented by the folks who run broadcast television.

If that weren't enough, the SNL team — inadvertently or not — added what Gizmodo and Cult of Mac see as one more dig at Steve Jobs, with whom NBC has been feuding these many month. If you look closely, you'll notice that the iPhone used in the sketch has a little blue Installer icon on its face, a sure sign that the device was "jailbroken," or hacked, to add unauthorized programs — despite Apple's admonitions to the contrary.

NBC, of course, has bigger things to worry about right now. The Writers Guild called a strike at midnight and promised to set up picket lines in front of 30 Rock this morning, which means that unless the suits plan to write the sketches, SNL will be in reruns for the duration.

For Fake Steve Jobs' screed on the absurdity of the Hollywood labor situation, see his Secret Diary here.

It's been two months since Apple (AAPL) and NBC Universal (GE) broke up over video pricing on iTunes, but the wounds don't seem to have healed — at least for Jeff Zucker.

Variety reports today that NBC's CEO let loose on Apple in a breakfast interview with The New Yorker's Ken Auletta at Syracuse University. Zucker claims that NBC — Apple's single largest video partner — made only $15 million in iTunes sales in the past year. That's about 1/3 of what outsiders had estimated and far less than the entertainment giant is used to pulling in from hit properties like The Office and 30 Rock.

"We don’t want to replace the dollars we were making in the analog world with pennies on the digital side," he said, according to Variety.

But in describing the negotiations that led to an impasse in August, Zucker repeated claims that Apple has already contradicted, specifically:

• that NBC Universal represented 40% of Apple's iTunes video content (Apple claimed in a press release it was only 30%)
• that its demands were modest: to raise the price of one show — any show — from $1.99 per episode to $2.99 (Apple claimed NBC wanted to hike the per-episode cost to $4.99)

Zucker also suggested that NBC was asking for something Steve Jobs is unlikely to give any media partner: a cut of his iPod sales.

"Apple sold millions of dollars worth of hardware off the back of our content and made a lot of money," Zucker said. "They did not want to share in what they were making off the hardware or allow us to adjust pricing." (link)

NBC's iTunes contract with Apple expires in December and from the tenor of Zucker's remarks, renewal doesn't seem likely. “We know that Apple has destroyed the music business – in terms of pricing – and if we don’t take control, they’ll do the same thing on the video side,” he told the breakfast audience, according to FT.com.

NBC and News Corp., meanwhile, are set to launch Hulu.com, their bid to offer studio-produced video on the Web that's supported, like broadcast TV, with advertising. Hulu is handing out beta subscriptions here, if you want to give it a try.

See What iTunes Looks Like Without NBC and Apple to NBC: Drop Dead